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What GAO Found

To reduce the backlog of incurred cost audits, the Defense Contract Audit Agency (DCAA) implemented an initiative to focus its resources on auditing contractors' incurred costs that involve high dollar values or are otherwise determined to be high risk. Incurred cost audits are conducted on a contractor's annual proposal that includes all costs incurred on certain types of contracts in that fiscal year. Under the initiative, DCAA raised the dollar threshold that triggers an automatic audit on a contractor's incurred cost proposal from $15 million to $250 million, revised the criteria used to determine a proposal's risk level, and significantly reduced the number of low risk audits that will be randomly sampled. This initiative appears promising, and DCAA plans to track certain characteristics, such as the number of risk determinations made and audits completed. But DCAA has not fully developed the measures by which it will assess whether the initiative reduces the backlog in a manner that protects the taxpayers' interests. Specifically, DCAA does not have a plan for how it will determine whether key features of the initiative, such as the revised risk criteria and the revised sampling percentages, should be adjusted in the future. By 2016, DCAA estimates it will reduce the backlog and reach a steady state of audits, which it defines as two fiscal years of proposals awaiting review. DCAA's ability to achieve this goal will depend on a number of factors, including the number of proposals determined to be high risk, which as of September 2012 was about two-and-a-half times more than anticipated.

Reducing the backlog of incurred cost audits will ease one obstacle to closing over-age contracts, but other obstacles, such as limited data and performance metrics, must still be overcome. The military departments have limited data on the extent and nature of their contract closeout backlog, and the Defense Contract Management Agency (DCMA)--which performs contract administration services for the Department of Defense (DOD)--is missing information that would allow it to identify contracts that it could act on. Such data can cue agencies on how to identify or tailor approaches to address the backlog. Further, the military departments generally do not have performance metrics to measure progress in closing out contracts. The Army recently announced a goal of closing over 475,000 contracts by September 2014; however, it does not yet have the information necessary to know if it can reach this goal and does not have an implementation plan. The Navy and the Air Force had not established any department-wide performance metrics for contract closeout. In contrast, DCMA has established two agency-wide performance metrics related to contract closeout that are regularly monitored. While many officials said contract closeout was not a priority, GAO found some local contracting activities taking action to bring attention to contract closeout.

Why GAO Did This Study

DOD has a large volume of contracts that have not been closed on time. Closing a contract includes tasks such as verifying that the goods and services were provided and making final payment to the contractor. Closing contracts within required time frames can limit the governments exposure to certain financial risks. One reason why some contracts are not being closed is the large backlog of incurred cost audits that must first be completed. These audits, conducted by DCAA, ensure that the costs contractors have incurred are permissible under government regulations.

The Senate Armed Services Committee report accompanying the National Defense Authorization Act for Fiscal Year 2012 directed GAO to review the criteria and procedures for conducting incurred cost audits, among other things. In response, GAO assessed (1) efforts to reduce the backlog of incurred cost audits and (2) the challenges DOD faces in addressing the contract closeout backlog. GAO reviewed DCAAs policies and procedures for incurred cost audits; analyzed data on the audit and contract closeout backlogs; and interviewed officials in the military departments and agencies.

What GAO Recommends

GAO is recommending that DCAA develop a plan to assess its incurred cost audit initiative; that DCMA improve data on over-age contracts; and that the military departments develop contract closeout data and establish performance measures. DOD concurred with the recommendations and identified ongoing and planned actions to address them.

Recommendations for Executive Action

Status: Closed - Implemented

Comments: DCAA has implemented this recommendation. DCAA developed a monitoring plan that includes measures to assess its progress in achieving its objectives, as well as to identify whether changes are needed to its procedures or criteria for addressing the backlog. For example, one measure involves DCAA analyzing audit results for contractor proposals deemed high risk to determine whether some of the risk criteria, such as the questioned costs from prior audits, are better indicators of risk than others. DCAA is regularly monitoring this measure and others to see if adjustments to its plan for reducing the incurred cost audit backlog are needed.

Recommendation: To improve DCAA's ability to assess whether its incurred cost backlog initiative is achieving the objectives of reducing the incurred cost audit backlog while continuing to protect the taxpayer's interests, the Director, DCAA, should develop a plan that includes time frames and measures to assess progress towards achieving its objectives, and as appropriate, to identify how it will assess whether the changes in DCAA's procedures and criteria are appropriate or require further revisions.

Comments: The Air Force has taken initial steps to implement the recommendation. The Air Force started a data collection effort on the status of contract closeouts in January of 2013, but more action is needed to implement the recommendation. While agency officials report that the issue of contract closeout has senior management attention, the Air Force has not yet established baseline data or performance metrics to track the progress on its contract closeout backlog.

Recommendation: To increase visibility and enhance management attention on closing out contracts within their departments, the Secretaries of the Navy and Air Force should, respectively, develop baseline data and performance measures for closing out contracts, including consideration of the use of quick closeout procedures, as appropriate.

Agency Affected: Department of Defense: Department of the Air Force

Status: Open

Comments: The Department of the Navy has taken some steps to address this recommendation, but additional actions are needed. In August 2014, the Department of the Navy's Office of the Assistant Secretary for Research, Development, and Acquisition started drafting a data collection instrument designed to collect information on the number of contracts due for closeout and the overall value of the contract. The draft data collection is a step towards developing baseline data, however the Navy still needs to develop a baseline and develop performance measures for closing out contracts, including the use of quick closeout procedures as appropriate.

Recommendation: To increase visibility and enhance management attention on closing out contracts within their departments, the Secretaries of the Navy and Air Force should, respectively, develop baseline data and performance measures for closing out contracts, including consideration of the use of quick closeout procedures, as appropriate.

Agency Affected: Department of Defense: Department of the Navy

Status: Open

Comments: The Department of the Army has taken steps towards addressing this recommendation. The Office of the Deputy Assistant Secretary of the Army (Procurement) established a contract closeout task force and identified a baseline of 377,160 contracts to be closed (this baseline was revised downward from the estimated 475,000 overage contracts the Army had reported at the time of our review). The Army has also established goals for when these overage contracts should be closed. However, the Army has not provided updated baseline numbers for 2014. The Army has also drafted a template for its commands to track the number of overage contracts, goals for closing these contracts, and actual contracts closed, among other things, which was implemented in July 2014. According to an Army official, this template has yet to be included in a closeout report to senior management. In addition, an Army official reports that the contract closeout taskforce continues to explore a number of efforts to improve its closeout processes and procedures going forward, such as electronic closeout tool.

Recommendation: To facilitate the closeout of contracts within the Army, the Secretary of the Army should ensure that the Army's contract closeout implementation plan includes baseline data and performance measures, and includes consideration of the use of quick closeout procedures, as appropriate.

Agency Affected: Department of Defense: Department of the Army

Status: Open

Comments: DCMA has taken some steps to address this recommendation, but more needs to be done. DCMA reported that the agency has a mechanism for querying its database to identify who has responsibility for moving the contract forward in the closeout process. The report developed from this query links the information of who is responsible for moving the contract forward to the stage in the closeout process where the contract is currently held up. However, some of the data is missing from DCMA's report, and DCMA is in the process of revising the report to include all of the data on who has responsibility for contract closeout. Without complete data in the report, DCMA management has only part of the information it needs to effectively monitor where and why overage contracts are held up in the closeout process, which could enable them to develop solutions for moving these contracts forward.

Recommendation: To enable DCMA to better identify contracts that may be closed out, the Director, DCMA, should take steps to ensure the data in DCMA's contract information system on who has responsibility for moving the contract forward in the closeout process is complete.